DAX, USD/JPY Forecast :Two trades to watch

DAX looks to the ECB rate decision 

• ECB is expected to leave rates unchanged at 4% 
• German IFO business climate
• DAX a hawkish sounding Lagarde could send DAX lower 

The DAX, along with its European peers, is heading lower as investors look cautiously ahead to the latest ECB interest rate decision, although remains near record highs. Optimism of rate cuts and record highs in the US have boosted stocks in recent sessions.

The central bank is widely expected to leave interest rates on hold at record highs of 4% this meeting as inflation ticked higher to 2.9% in December and despite signs of weakness in the region's economy. 

ECB president Christine Lagarde is likely to continue to push back on rate cut expectations in order to buy more time to ensure that inflation is trending towards the 2% target, particularly given recent concerns over supply chains amid geopolitical tensions in the Middle East. 

The market had been expecting a rate cut as soon as April, although it has dialed back expectations over the past few weeks. Meanwhile, the eurozone was also likely in a recession at the end of 2023, and PMI data yesterday showed that business activity contracted for an eighth straight month in January, keeping dovish ECB bets alive. 

As well as the ECB rate decision, the German Ifo business climate index for January is due and comes after the institute downwardly revised its 2020 for economic growth forecast, the eurozone's largest economy. 

DAX forecast – technical analysis 

DAX rebounded off the 50 SMA, rising above resistance at 16840, last week’s high, bringing 17000 into focus and fresh all-time highs. 

On the downside, minor support can be seen at 16650, the 20 SMA, and 16600, the weekly low. A move below here exposes the 50 SMA dynamic support at 16500.  A fall below 16344 is needed to create a lower low. 

USD/JPY rises ahead of US Q4 GDP data 

• US Q4 GDP is forecast to cool to 2% vs 4.9% previously 
• Tokyo core CPI to cool to 1.9% 
• USD/JPY bulls need to rise above 148.80 to target 150.00 

USD/JPY is heading higher after losses in the previous session. The yen had strengthened after the Bank of Japan hinted towards a hawkish pivot potentially as soon as March.  

Meanwhile, strong Japanese trade data supported the view that the central bank could move out of negative interest rates sooner rather than later. Much of this will depend on the path for inflation, and attention will be on Tokyo CPI, due later today, which is considered a good lead indicator for Japanese inflation.  

Tokyo core PC CPI is expected to ease to 1.9% down from 2.1% in December. 

The US dollar is looking cautiously ahead to key data over the coming days, which could provide more clues about the health of the US economy and when the Federal Reserve may start to cut interest rates. 

US Q4 GDP is expected to cool to 2% from 4.9% annualised which would suggest that growth is slowing although it is still significantly stronger than G7 peers.  

The data is not likely to provide the Fed with reasons to start cutting rates, which could keep the USD supported; meanwhile, core PCE figures are due tomorrow. Signs of sticky inflation could also see the market temper further fed rate cut bets. 

USD/JPY -forecast -technical analysis 

After extending its run-up from 140.25, the USD/JPY ran into resistance at 148.80 before easing back but held above the 100 SMA around 147.50 as the price stabilizes. 

A breakdown could spur a retracement towards 146.65, the weekly low, and 145.00, the July high. A break below here exposes the 200 SMA.  

Buyers, meanwhile, will look for a rise above 148.80 to extend gains to the 150.00 psychological level.